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December 2016

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Even as most players in India’s e-commerce space are struggling to break-even, a recent report has estimated that the industry may turn profitable at an operating level by around 2020. According to UBS Securities, the Indian e-commerce market is likely to grow 10 times from the current level and touch $50 billion (Rs 31,169 crore) by 2020, when it also starts making operating profits. “Investor concerns about e-commerce being a bubble in India are misplaced, in our view,” UBS said in the report, according to media reports.

“Our analysis of the supply-chain for offline retail by category implies adequate margins for e-tail in future. Inherent operating leverage in the business model and 700 basis points (as a percentage of gross merchandise value) lower discounting should lead to operating profit for the industry by 2020,” the report said. The estimates have been assessed based on a multi-factor approach that includes accessibility, affordability, adaptability, and accountability.

UBS Securities believes India’s e-commerce sector is well placed for “significant growth”, which will be driven by the favourable demographics in the country, multifold rise in Internet penetration, and scarcity of organised retail. It also said that players in the sector are already looking to solve “initial issues” around acceptance, lack of credit and debit card penetration, and last-mile delivery through innovative solutions such as cash on delivery and specialised e-logistic operations.

“3G rollout and affordable mobile handsets are key drivers, with the bulk of online traffic now mobile driven,” the report said. “We believe telcos and logistics will be beneficiaries while offline retail could be vulnerable. E-commerce will dilute distribution as an edge for consumer companies in India as it conceptually breaks these barriers.”

The report added that grocery could be a key segment for growth going forward and success in the category could lead to a significant upside in the estimated valuations of several players.

According to the UBS report, standardised products may be vulnerable but premium product brands could see a significant expansion in penetration in previously unserved tier III and IV cities through e-commerce. (SH)